PFGBest Used Old Phony P.O. Box Ploy to Elude Regulators

Since the National Futures Association alleged on Monday that PFGBest had been missing something in the neighborhood of $200 million since as early as February 2010, we’ve been wondering how the missing funds escaped auditor attention for so long. Did auditors simply take the firm at its word that the money was there? Now Reuters has an answer: firm founder Russell R. Wasendorf Sr., who attempted suicide on Monday morning, is said to have stolen and falsified the regulatory documents that might have uncovered the missing funds (emphasis ours):

Wasendorf intercepted confidential regulatory documents that were mailed by the National Futures Association to what the industry group believed was U.S. Bank, PFG’s bank, a person close to the situation told Reuters. Instead, they were sending the documents, used to independently verify a broker’s bank balances, to a post office box that Wasendorf had set up, the source said, who declined to be identified.

The CFTC complaint, which relies on many of the details released on Monday by the NFA, the broker’s main regulator, said the bank account that PFG reported was holding $225 million in 1,845 customer accounts actually contained only $5 million.

Wasendorf forged signatures and fabricated bank balances on the documents and simply mailed them back to the Chicago-based NFA, the person said. The scheme apparently began to unravel as the NFA shifted to electronic confirmations.

It all sounds like the kind of thing that a schoolboy would dream up to keep his parents from seeing a bad report card, and calls to mind an image of Peter Madoff filling out phony paperwork in different color pens, to create the impression that his documents had been completed on different days, or Stuyvesant High School test takers sharing answers on their cellphones. Meanwhile, we’re not sure whether Reuters sources meant to reassure us that the weaknesses exploited by Mr. Wasendorf have been shored up by the shift to an electronic system, but we guess it’s hard to be too confident in a regulatory regime that lost track of $200 million dollars to a scheme a ninth grade math teacher might have sniffed out. A fake P.O. Box—can it really be that easy?